Friday, May 31, 2013

This year marks that 50th anniversary of
the branch of mathematics known as chaos theory. Appropriately enough for a
field of study premised on the idea that seemingly insignificant events can
have large and unpredictable consequences, the eureka moment of chaos is generally considered to be a short dense paper
titled "Deterministic
Nonperiodic Flow" published on page 130 of volume 20 of the Journal of the Atmospheric Sciences in
1963.

As James Gleick writes in his very entertaining history, Chaos:
Making of a New Science, "In the thousands of articles that made up the
technical literature of chaos, few were cited more often than "Deterministic
Nonperiodic Flow." For years, no single object would inspire more
illustrations, even motion pictures, than the mysterious curve depicted at the
end, the double spiral that became known as the Lorenz attractor."

The paper's author, Edward Lorenz, was an MIT
mathematician working on an early computer weather modeling simulation.
One day in 1961, in an effort to save time waiting for his vacuum
tube-powered Royal McBee computer to run the program, Lorenz started his
simulation from the middle, manually entering in data from an earlier
simulation, but crucially, rounding a six decimal point number to three
decimal points in order to save space. What
Lorenz found
after returning from a coffee break was that these tiny, seemingly
arbitrary changes in his initial inputs had led to vastly different
outcomes in the weather models he
created.

As Gleick
writes, "Lorenz saw more than randomness embedded in his weather model. He saw
a fine geometrical structure, order masquerading
as randomness." Lorenz, who died in 2008, would later become best known for coining
the metaphor of the "butterfly effect" to describe systems that are extremely sensitive to their initial conditions.

Most casual readers can't understand much of the
mathematics of chaos theory, but the basic principles were popularized thanks
in part to Gleick's bestselling book, not to mention the trippy Mandelbrot
Set images that have graced countless screensavers and dorm room posters
and, of course, Jeff Goldblum's character in Jurassic Park.

Chaos doesn't have quite the pop culture cachet that
it used to, but the study of what Lorenz called nonlinear systems - those in
which outputs are not necessarily proportional to inputs -- has been highly influential in fields ranging
from physics, to engineering, to astronomy, agriculture to economics. (One of the main themes of Gleick's books is
that researchers in different fields were often working along very similar
lines without being aware of each other. Some of this work was actually going on years before Lorenz's "discovery.")

The late mathematician Benoit
Mandelbrot's ideas
about turbulence in financial markets have enjoyed something of a renaissance in
recent years thanks the global financial crisis. I was lucky enough to get the
chance to
interview Mandelbrot for FP a year before his death....MUCH MORE

...Third, and perhaps more important to some, based on intraday data so far, the much-discussed Hindenburg Omen has been spotted. The last time we were this high in stocks and the Hindenburg was spotted was October 2007...MORE

...and The Hindenburg Omen... (red bars on upper pane)... click for large version...

Although CXO Advisory is one of our 1300 feeds and one I try to get to at least twice a week I somehow missed this. FT Alphaville didn't.
First CXO goes through the methodology of their test, in-depth as always, then:

...In summary, evidence from simple tests of a
publicly available set of “confirmed” Hindenburg Omens suggests the
possibility of usefulness, but reservations regarding small sample size
and potential sample bias are strong.
The vivid image evoked by the name may be an important factor in media attention to the Hindenburg Omen.

The stock closed at $ 100.64 -$4.33 (-4.12%) which was the low for the day.
Now it turns out that Monsanto may have been regaling the USDA with tall tales.
From Bloomberg:Monsanto Resumed Field Trials of Roundup Ready Wheat

Monsanto Co. (MON), the world’s largest
seed company, resumed planting of experimental wheat engineered
to survive Roundup herbicide, U.S. data show, reviving a similar
program that has caused international concern with the discovery
that the crop escaped in Oregon.

Monsanto last year planted 150 acres of wheat in Hawaii
that was genetically modified to tolerate glyphosate weedkiller,
which the company sells as Roundup, according to a Virginia Tech
database administered by the U.S. Department of Agriculture.
Another permit allows Monsanto to test wheat with multiple
traits, including Roundup tolerance, on 300 acres in North
Dakota this year.

Monsanto said May 29 in a statement that it ended its
program to develop Roundup Ready wheat nearly a decade before
the USDA announced this week that the experimental crop was
discovered growing on an Oregon farm. The Roundup Ready wheat in
the new field trials is “an entirely different event” than the
escaped crop reported by the USDA, Monsanto said.

“This research is still in the very early phases and at
least a decade away from commercial approval,” Lee Quarles, a
Monsanto spokesman, said in an e-mail response to questions
today. “The Roundup Ready wheat project that is the subject of
the USDA report was previously discontinued.”
The Oregon discovery prompted Japan to suspend imports of
western-white wheat and feed wheat and South Korea to increase
inspections on imports. In the statement, Monsanto said it
completed “closing out the Roundup Ready wheat program” nine
years ago.

The USDA is investigating how the experimental wheat was
found so long after Monsanto said research ended. Monsanto
conducted eight Oregon field trials on herbicide-tolerant wheat
between 1999 and 2002, according to the Virginia Tech database....MORE

And from the Washington Post: European Union urges testing of U.S. wheat imports for unapproved Monsanto strain

The European Union advised member states Friday to test certain wheat
shipments from the United States, and South Korea joined Japan in
suspending some U.S. wheat imports in response to the recent discovery
of unapproved genetically modified wheat in an 80-acre field in Oregon.

The E.U. consumer protection office said in a statement that it
was “following carefully the presence of this non-authorized GM
[genetically modified] wheat in Oregon in order to ensure that European
consumers are protected from any unauthorized GM presence and make sure
that the E.U. zero tolerance for such GM events is implemented.”

The 27-member European Union imports more than 1.1 million tons of
American wheat a year, 80 percent of which is soft white white, the
Associated Press reported. Spain is the leading buyer....MORE

Wearing a neuro-headset, Thinker Thing's George Laskowsky has done
the unimaginable. He has thought an object into existence. From the
sound of it, this is something that just can't happen. It is a power
reserved not for man, but for the gods. And yet this little orange
robotic-looking arm was created by the power of a human brain.

Well,
that and a whole lot of software — and a 3D printer. So the object in
question didn't just wink into existence when Laskowsky thought of it.
Unless, that is, you look at the event in the right light.

Here's how the whole thing works: First you strap on the EPOC headset,
built by Emotiv. Then the Thinker Thing program starts, showing you a
display of a very basic shape. Next, as you watch, the object begins to
mutate and evolve.

You emotionally react, approving and disapproving
shapes based on how close they are to the object you've thought up. The
mental signals that you're sending off with your emotions are picked up
by the EPOC headset and guide the future development of the Thinker
Thing program. Eventually, the object upon the screen resembles your
mental picture and it's time to hit print....MORE

The BEA's Personal Consumption Expenditures Chain-type Price Index
for April shows core inflation well below the Federal Reserve's 2%
long-term target at 1.05%, the lowest Core PCE ever recorded; the
previous all-time low was 1.06% in March 1963, fifty years ago. The Core
Consumer Price Index release earlier this month, also data through
April, is significantly higher at 1.72%. The Fed is on record as using
PCE as its primary inflation gauge.

The inflation rate over the longer run is primarily determined by
monetary policy, and hence the Committee has the ability to specify a
longer-run goal for inflation. The Committee judges that inflation at
the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures,
is most consistent over the longer run with the Federal Reserve's
statutory mandate. Communicating this inflation goal clearly to the
public helps keep longer-term inflation expectations firmly anchored,
thereby fostering price stability and moderate long-term interest rates
and enhancing the Committee's ability to promote maximum employment in
the face of significant economic disturbances. [Source] Note: Bolding added by me.

Elsewhere the Fed stresses the importance of longer-term inflation
patterns, the likelihood of persistence and the importance of "core"
inflation (less food and energy). Why the emphasis on core? Here is an
excerpt from one of the Fed FAQs.

Finally, policymakers examine a variety of "core" inflation measures to
help identify inflation trends. The most common type of core inflation
measures excludes items that tend to go up and down in price
dramatically or often, like food and energy items. For those items, a
large price change in one period does not necessarily tend to be
followed by another large change in the same direction in the following
period. Although food and energy make up an important part of the budget
for most households--and policymakers ultimately seek to stabilize
overall consumer prices--core inflation measures that leave out items
with volatile prices can be useful in assessing inflation trends.
[Source]

Fed's Short-Term Target Broadened to 2% to 2.5%
In the shorter term, however, the Fed has raised the top range of its
inflation target by half a percent. The change was announced to the
public in the December 12, 2012 FOMC press release...MORE including charts

Dan
Drezner, call your office. A new Israeli horror film, Cannon Fodder, depicts the tribulations of an IDF commando team
that enters south Lebanon -- only to discover their problem isn't Hezbollah, but
marauding zombie hordes.

To make a not particularly long but certainly confusing
story short, the Israeli commandos and the Lebanese paramilitary organization
join forces in order to combat the zombie menace. Along the way, there are
people beheading zombies with swords, a man on fire, and no shortage of puns
about the real-life Mideast conflict. As the preview intones: "In a region
infected by war ... where bad blood consumes all hopes for peace ... the fight for
borders has lost its meaning."...MORE

You have probably noticed she hasn't posted at Alphaville this week.
From her personal blog, Dizzynomics:

Generation clash

After my panel yesterday I was approached by a gentleman who was
greatly offended by my proposition that a) the Roman Empire collapsed
because it failed to make the next great technological leap into a more
sophisticated fuel economy and b) felt necessary to lecture me about the
inflation problems of the 80s and that my suggestion that QE didn’t
have to end badly was naive as a result.

On the latter point I felt that he really thought I needed to be
educated about the 70-80s inflations, that I had obviously never heard
of the episode and that this was the single most important lesson in all
economic history. He was very patronising, dismissive, accusatory and
arrogant in his manner.

I countered with the point that inflation can not be a major issue if
there is no shortage of goods or wage pressures due to unemployment.
Second, hyperinflation is almost always associated with countries which
have liabilities denominated in foreign currencies.

He retaliated a bit with some repetition of the same points he
originally made as if he had not actually listened. I repeated. I think
he finally got the point. Changed subject to something else gold buggy.

Before that there was the Roman confrontation, which involved him
preaching to me (BA ancient history) that the Romans were the best
technologists in the ancient world and then.. In the weirdest statement
of all time… That i was being stupid because how could the Romans have
invented combustion or an oil-based economy because that didn’t get
invented till the 19th century. Like this invention was always set in
stone for the 19th....MORE

How much does it cost to be Jay Gatsby today? Or simply the literary scribe F. Scott Fitzgerald?

A lot more and a lot less than you think. In his ledger for 1923,
Fitzgerald budgeted $100 a month for “wild parties” and another $80 a
month for “house liquor.” That year he and his family were living in
Great Neck on Long Island–the model for West Egg of The Great Gatsby–and he was just getting started on what would become his most famous book.

While it wasn’t exactly Gatsby money, $100 a month for wild parties
was no small sum. Adjusted for inflation, that’s $1,360 in 2013 dollars,
or more than $16,000 a year.

But Fitzgerald could afford it at the time.

According to his
accounts, he earned $28,758.79 from his writing in 1923, including a
$3,939 advance for Gatsby, enough to put him in the top 1% of
taxpayers. The same detailed ledger suggests his effective tax rate was
8.3%. (For more on Fitzgerald’s high life and tax returns, see “Living on $500,000 a Year” in The American Scholar, a study by University of South Carolina law professor William J. Quirk.)

Today, that $29k in annual earnings would equal $390,000, and Jeffrey
Pretsfelder, senior tax analyst at Thomson Reuters, calculates that the
tax rate, including payroll taxes and New York State taxes, would be
37.5%. So a dollar of earned income in 1923 went 20 times further than
it does today.

That income side of his ledger helps puts his outgoings in
perspective. Furthermore, the cost of being rich has gone up
considerably since then, which is why Gatsby’s over-the-top
extravagance, much on display in Baz Luhrmann’s compelling and
spectacular new film of the book, doesn’t seem implausible at all....MORE

Shhhh, don't tell mayor Bloomberg that this happened on his watch while he was preoccupied with soft drinks.
From Joel Kotkin's blog:

Appearing in:

Forbes.com

Over the past 60 years, financial services’ share of the economy has exploded
from 2.5% to 8.5% of GDP. Even if you believe, as we do, that
financialization is not a healthy trend, the sector boasts a high number
of relatively well-paid jobs that most cities would welcome.
Yet our list of the fastest-growing finance economies is a surprising
one that includes many “second-tier” cities that most would not
associate with banking. To identify the cities making the biggest gains,
we ranked metropolitan statistical areas’ employment growth in the
sector over the long-term (2001-12), mid-term (2007-12) and the last two
years, as well as momentum.

New High-Fliers
Tops on our list among the 66 largest metro areas is Richmond, Va.,
where financial sector employment has grown an impressive 12% since
2009. This reflects the presence of large banks such as Capital One
Financial , the area’s largest private employer with 10,900 jobs, and
SunTrust Banks , which employs 4,400. The insurer Genworth Financial is
based in Richmond, and Wells Fargo and Bank of America also have sizable
operations there. Along with the Northern Virginia metropolitan
statistical area (an area encompassing the state’s suburbs of
Washington, D.C., including Fairfax, Arlington, Loudoun and Prince
William counties), which is No. 7 on our list, the Old Dominion is
quietly becoming a major financial power.
In once-gritty Pittsburgh, which places second on our list, financial
services is now the largest contributor to the regional GDP,
according to the Allegheny Conference.
Long seen as a backwater, the area has begun to lure the kind of
highly trained workers used by financial firms, leading Rust Belt
analyst Jim Russell to joke, “Pittsburgh is becoming the new Portland.” Financial employment there has grown nearly 7% since 2009. The strongly reviving local economy spans everything from energy to medical technology.

Like Pittsburgh, some of the areas doing well in financial services
are also thriving generally. These include such Texas high-fliers as
No. 3 Ft. Worth-Arlington, where financial services employment has
expanded over 12% since 2007, as well as No. 4 San Antonio-New
Braunfels. And it is not real estate that is driving this boom—in Fort
Worth, for example, the “real estate and rental and leasing”
sub-sector of financial services shed jobs over the last five years
while the “finance and insurance” subsector expanded almost 20%.

Some metro areas that aren’t exactly setting the world on fire are
scoring in the financial job sweepstakes. Jacksonville, Fla., ranks
fifth on our list and St. Louis, MO-IL ranks eighth. In St. Louis,
financial sector employment is up 6.4% since 2007 by our count, and the
number of securities industry jobs has increased 85% to 12,000 over
that span, according to the Wall Street Journal.

What’s Driving Dispersion of Financial Services?
The largest traditional financial centers appear to be losing their
edge. New York, home to by far the largest banking sector with 436,000
jobs, places a meager 52nd on our list of the cities winning the most
new jobs in the sector. Big money may still be minted in Gotham, but
jobs are not. Since 2007 financial employment in the Big Apple is down
7.4%....MORE

File under "Headlines I did not expect to see".
From the EIA via the CME:

Canadian refineries, like those in the United States, are working to
increase their use of growing production of crude oil from Texas and
North Dakota.

Monthly exports of crude oil from the United States to Canada have
historically averaged 24,000 barrels per day (bbl/d) and were
principally delivered to refineries in central Canada. However, U.S.
exports to Canada averaged nearly 100,000 bbl/d over the first 3 months
of 2013.

While the Midwest (PADD 2) has been the traditional delivery source
for U.S. crude oil exports to Canada, the recent increase in exports is
being led by deliveries from the Gulf Coast (PADD 3) and the East Coast
(PADD 1).

Nearly all of the PADD 3 crude exports to Canada were light crude
oil. Trade press reports indicate that Suncor Energy, Irving Oil,
Trafigura and Valero are among the companies that have already shipped,
or will soon ship, crude oil from the U.S. Gulf Coast to refineries in
eastern Canada.
PADD 1 exports were barrels that moved east from North Dakota's
Bakken region by rail and then were exported through New York state.

According to the Canadian Association of Petroleum Producers,
Canadian refineries in 2011 processed 878,000 bbl/d of western Canadian
crude, 110,000 bbl/d of eastern Canadian crude, and 680,000 bbl/d of
imports.

The imports primarily supply refineries in eastern Canada
that have limited access to western Canadian production or are
configured to run light crude oil....MORE

During a CNBC appearance this morning, Tesla founder and CEO Elon Musk said Tesla could partner with Google on self-driving car technology.

Tesla Motors (TSLA) shares are down $1.50, or 1.5%, at $103.36. Shares of Google (GOOG) are up less than a point to $875.31 in morning trading.

But before you get too excited about the prospect of 22nd-Century
cruise control — a coffee in one hand and smartphone in the other — the
government saw fit to issue a new policy yesterday on vehicle automation
– see this U.S. Department of Transportation press release.

Today, in a series of CNBC questions from Carl Quintanilla, Jim Cramer, and David Faber,
Musk said there is a “good chance” Tesla would partner with Google to
develop self-driving cars. But he said there is nothing planned at the
moment, and that Tesla is interested, itself, in developing a
self-driving car technology.

Musk said Tesla may be able to produce a model costing $35,000 or so
in about three to four years. When Cramer asked whether cheaper models
would hurt the resale value of the current “Model S,” Musk said he
thinks the current car will maintain its value because demand will be
higher than the company’s own manufacturing ability for some time to
come....MORE

With economic analysis no longer a relevant consideration in the New Normal as Jeff Gundlach explained yesterday, the only real question since the advent of global QE, first in the US, then in Japan, soon everywhere else, is when does the Fed stop. And
not just Taper, because while the Fed may slow down the flow pace of
liquidity injection one month, it will promptly reaccelerate it just
after when risk tumbles, but the structural, and terminal end of QE.

So to supplant the critical perspective on when/if the Fed finally
pulls the plug we present the following observations by Pimco's Richard
Clarida who looks at the end of QE from a more conventional
macroeconomic perspective. His thoughts are presented below in their
entirety.

But before absorbing the full analysis, here is Clarida's punchline
distinguishing between those who believe the Fed is doing something
positive, versus those who, correctly, understand it is Ben Bernanke's
own fault for clogging up the monetary transmission mechanism, and for
de facto "breaking the market" which is now - like a liquidity-addicted
drug addict - impossible to visualize a world in which the Fed does not
provide zero-cost training wheels from here until eternity:

QE detractors... see something quite different. They
see QE as not responding to the collapse in the money multiplier but to
some extent causing it. In this account QE – and the flatter yield
curves that have resulted from it – has itself broken the monetary
transmission mechanism, resulting in central banks pushing ever more
liquidity on a limper and limper string. In this view, it is not inflation that’s at risk from QE, but rather, the health of the financial system. In
this view, instead of central banks waiting for the money multiplier to
rebound to old normal levels before QE is tapered or ended, central
banks must taper or end QE first to induce the money multiplier and bank
lending to increase.

This is absolutely spot on, but unfortunately this "liquidationist"
path to fixing a problem that should have been addressed five years ago
is now a dead end, as Bernanke knows he can not end QE in some
interim phase without achieving (runaway) inflation or all that he has
"accomplished" for the market, if not the economy will be undone. Even
if, ironically, the market crash that results, would be just the
debt-liquidating economic catharsis the developed world has been begging
for since the advent of central planning....MUCH, MUCH MORE

As most of civilized society knows, it’s considered
pretty classless to mistreat waiters or waitresses, and a pretty
fool-proof indication of your character. In fact, there’s only one acceptable way
to act like an insufferable prick to a person waiting on you, and
that’s beginning a meal by whipping out a stack of singles and telling
the server, “Let’s establish something. You are, I assume, expecting a
tip? This pile of one dollar bills represents your potential tip. Every time you please me, you’ll see the pile grow. However, if I am unsatisfied...MORE

MarketBeat
picked up on the waitress story but appears to take particular umbrage
at the very notion of Mr. Gross' literary stylings:

Bill Gross: His Most Obnoxious Note Ever!

Where should we start? Bond king — or former bond king? –
Bill Gross is out with his monthly investment outlook note. Mr. Gross
is not merely satisfied managing the world’s largest bond fund. (Pimco
Total Return Fund: $240.7 billion in assets in December.) Nay, he
fancies himself something of a scribe, and his monthly investment outlook is
where he talks his book for a few hundred words spicing it up with
some belabored metaphors and a self-serving analogy, or several. But
there are a few things that stick in our craw about this month’s
note....MORE

That is professional pixilator Matt Phillips.
[Don't mind Mr. C, he's trying to combine the computer science term
pixelate with a word for whimsical/bemused. el vs. il. I prefer the second of these definitions -ed]

A strain of genetically
modified wheat found in the United States fuelled concerns over
food supplies across Asia on Thursday, with major importer Japan
cancelling a tender offer to buy U.S. grain.

Other top Asian wheat importers South Korea, China
and the Philippines said they were closely monitoring the situation
after the U.S. government found genetically engineered wheat sprouting
on a farm in the state of Oregon.

The strain was never approved for sale or consumption.

Asian consumers are keenly sensitive to gene-altered food,
with few countries allowing imports of such cereals for human
consumption. However, most of the corn and soybean shipped from
the U.S. and South America for animal feed is genetically
modified.

"We will refrain from buying western white and feed wheat
effective today," Toru Hisadome, a Japanese farm ministry
official in charge of wheat trading, told Reuters.

The U.S. Department of Agriculture on Wednesday said the
wheat variety was developed years ago by biotechnology giant
Monsanto Co. It was never put into use because of
worldwide opposition to genetically engineered wheat....MORE

Here's Mother Jones with some backround on what led to the Japanese decision:

Wheat's non-GMO status is why the Internet went berserk when the US Department of Agriculture revealed Wednesday that Roundup Ready wheat had sprouted up on a farm in Oregon. According to the USDA,
a farmer discovered the plants growing in a place they shouldn't have
been and tried unsuccessfully to kill them with Roundup. Oops. USDA
testing confirmed that the rogue wheat was the same experimental Roundup
Ready variety that Monsanto had last been approved to test in Oregon in
2001....MORE

Update:
In March the Senate passed a continuing resolution to fund the U.S. government through September.
Hidden in the CR was a bland little amendment that Monsanto thinks exempts it from judicial review of what they do. Critics call it The Monsanto Protection Act..

The only working farmer in the Senate, John Tester of Montana was furious and had some words for his colleagues prior to passage. From the Senator's Senate Homepage:Tester slams ‘corporate giveaways’ in government funding bill

(U.S. SENATE) - Senator Jon Tester today called out the House of
Representatives for slipping ‘corporate giveaways' into a must-pass
government funding bill designed to keep the government running past
March 27.

Tester slammed the inclusion of two provisions that
will hurt family farmers and ranchers while benefitting large
meatpacking corporations and companies that develop genetically-modified
crops. Tester said backroom deals replaced open government and vowed
to strip the provisions from the bill.

"Montanans elected me to
the Senate to do away with shady backroom deals and to make government
work better," said Tester, who has made improving government openness a
hallmark of his time in the Senate. "These provisions are giveaways
worth millions of dollars to a handful of the biggest corporations in
this country and deserve no place in this bill."

Tester introduced two amendments to remove the controversial measures
from the bill. The first provision gives large meatpacking corporations
more power over the livestock market, while the second tells the U.S.
Agriculture Department to ignore any judicial rulings that block the
planting of crops that the court determines to be illegal.

Tester,
speaking on the Senate floor, said the inclusion of the measures made a
mockery out of "Sunshine Week" - when the federal government highlights
the need for greater transparency and openness in government....MORE

So, for our long-suffering readers, just because we haven't written much about this stuff doesn't mean we haven't been following it.

Further, in an important contribution, the USPIRG report provides
driving trend forecasts that are lower than other projections. If
accurate, these would result in materially greater greenhouse gas
emissions reductions to 2040 than projected by the Department of
Energy, further undermining the justification for anti-mobility policies as well as urban containment.

In fact, 2010 census data indicates that people between 20 and 29 years old were less inclined to live in more urban and walkable neighborhoods than their predecessors.
In 2000, 19 percent of people aged 20 to 29 lived in the core
municipalities of major metropolitan areas, where transit service and
walkable neighborhoods are concentrated. Only 13 percent of the
increase in 20 to 29-year-old population between 2000 and 2010 was in
the core municipalities. By contrast, the share of the age 20 to 29
living in the suburbs of major metropolitan areas was 45 percent,
higher than the 36 percent living there in 2000 (Figure 1).

The Decline in Driving
Driving per capita in urban areas peaked in 2005. Between 2005 and
2011, driving declined seven percent. In the context of rising gasoline
prices, and economic trends, the real news is not how much driving has
fallen, but rather how little. A seven percent reduction is slight
compared to the one and one-half times increase in gas prices over the
past decade (Figure 2). Per capita travel by car and light truck has
fallen back only to 2002 levels, which remained above the driving rates
of previous years.

Drivers: Not Switching to Transit
The USPIRG report gives the impression that instead of driving,
Americans are switching to other modes of transport, principally
transit. In discussing the report, Nick Turner, of the Rockefeller
Foundation said: "Americans are making very different transportation
choices than they did in years past."...MORE

The repo market is among the least glamorous businesses on Wall Street.

There aren’t any hot new offerings like the equity guys get. There
aren’t any splashy deals like the investment bankers get. The repo guys
look down the hall at the fixed-income guys and envy their exciting
lives of long-term interest-rate worry and credit-rating anxiety.

Overnight loans might be the world’s dullest one-night stand. Yet
these short-term loans are the lifeblood of credit, keeping companies
and banks flush and giving investors a place to park their cash and make
a few bucks.

Repos are a more-than-$2 trillion-a-month market. And when the
financial crisis exploded in 2008, the repo market froze, cutting off
credit across the economy and partly setting the stage for the Great
Recession.

A study on repo markets published in 2009by
Gary B. Gorton and Andrew Metrick of the National Bureau of Economic
Research concluded that “ultimately it was the loss of liquidity at the
firms that were the biggest players in the securitized banking system
that led to the financial crisis.”

In other words, the repo market wasn’t just a part of the meltdown. It was the meltdown.
Given the history, you would think regulators would have considered
how this market was set up and how it could be made a little safer. But
for the most part, the repo market is running pretty much as it was
precrisis.
This is especially true for the triparty repo market, a premium form
of the repo in which an intermediary manages the collateral backing the
loans. That part of the market is especially susceptible to panics. It
took a beating in 2008.

Thursday, May 30, 2013

When I was at eBay, we had a belief that no one was going to compete
with us by replicating exactly what we were doing. We had first mover
advantages and network effects. Amazon and Yahoo! both launched auction
marketplaces in response to eBay’s strong growth, and both businesses
were essentially DOA. What did concern us was that someone would compete with us with a new, disruptive approach—a completely different take on the business.

Early on, we came to believe that Google’s emerging search business
was the biggest threat that eBay faced. eBay helped users find
hard-to-find, unique products. Google’s goal of organizing the world’s
information also helped users find hard-to-find, unique products. The
mechanisms and models were different, but the overlap was clear and we
came to view Google as our top competitive threat.

This thought was validated after the fact by then-Google executive
Sheryl Sandberg. We both were guest speakers at the same Intuit event a
few years back, and I stayed after my talk to listen to Sheryl. In
response to a question, Sheryl said something along the lines of, “We
knew early on at Google that our key competitor was eBay.” I almost
jumped to my feet shouting, “I knew it!” It did not make me feel any
better that eBay was one of Google’s very top advertisers at the time,
and that we were paying them tons of money that they were in turn using
to compete with us.

In Google’s case today, I am becoming increasingly convinced that
their most challenging competitor isn’t another search engine like
Yahoo!, Bing, Baidu or Yahoo! Japan. It’s Amazon, which is bringing a
completely different take on search—in this case, product search.

Amazon is a vertical search engine focused on helping users find
products. The overwhelmingly dominant way to find things on their site
is the search box. Users enter a keyword phrase and are presented with
results that match his or her query. The order of the search results
is determined by algorithms that seek to optimize relevance and
monetization. Sound familiar?

In my personal website use, I increasingly find myself searching for
products on Amazon instead of Google. Shopping on Amazon is a superior
user experience and it runs the table on the magical retailer formula of
selection, price and convenience. It has an increasingly comprehensive
product assortment, with their ever-expanding direct sales supplemented
by third-party merchants who sell on the platform. Prices are almost
always extremely competitive, so much so that I have pretty much stopped
using Google to comparison-shop at different merchants. And it offers
the fastest and most cost effective shipping solutions, particularly in
Prime (which has the interesting impact of making me want to buy goods
on Amazon to make sure I get the most out of my $79/year Prime
membership). I can buy an item on Amazon in a minute, secure in the
knowledge that I’m likely paying the lowest price while getting free
shipping and fast delivery....MORE

Brokers and
software vendors are under renewed pressure to further develop
electronic trading tools, as buyside investors demand more sophisticated
technology to help them squeeze the last drop of profit from every
single trade.

Two recent reports from capital markets consultancies Tabb Group and Greenwich Associates
highlight the critical importance of sophisticated trading desk
technology and the tools demanded by institutional investors in their
quest for optimal trade performance.

The Tabb Group study released
yesterday looks at the evolution of algorithmic trading for equities.
Having previously been touted as a way to automate “simpler” orders,
thereby allowing traders to focus on trickier trades, buyside firms now
expect strategies to incorporate quantitative analytics to understand
the most appropriate strategies for a given order.

Tabb found that long-only buyside houses use an average of 50 algorithmic strategies from between eight and 12 providers.

Miranda Mizen,
principal and director of equities research at Tabb and author of the
report, said in a statement: “In the low-touch environment, the arms
race is shifting to the intelligence built into algorithms and
algorithmic strategies to give buyside traders an optimal choice of
tools and strategies and clear visibility of liquidity across the
marketplace.”....MORE

The group that supplies about 40% of the world’s oil will ship 23.91
million barrels a day in the four weeks to June 15, compared with 24.12
million in the previous period to May 18, the researcher said in an
e-mailed report. The figures exclude two of OPEC’s 12 members, Angola
and Ecuador. The organization will meet in Vienna tomorrow to discuss
its production target, which is currently 30 million barrels a day.
Demand from western nations is “limping,” reducing imports from the
Middle East and West Africa, Roy Mason, the company’s founder, said
today by telephone from Halifax, England. “There is no spectacular
increase in supply.”

Middle Eastern shipments will slip by 1.1% to 17.58 million barrels a
day, compared with 17.78 million in the month to May 18, according to
Oil Movements. That figure includes non-OPEC nations Oman and Yemen.

Crude on board tankers will advance 1.7% to 476.96 million barrels
versus 468.88 million in the previous period, data from Oil Movements
show. The researcher calculates the volumes by tallying tanker bookings.
Its figures exclude crude held on vessels for storage....MORE

Nat Gas futures are breaking down as the newly anointed spot July
contract is now trading well below the key technical support level of
$4.16/mmbtu. Since the EIA inventory report (see below for a more
detailed discussion) was issued the market has traded slightly lower
than where it was just prior to the report release. The EIA injection
was within the market consensus, greater than last year but below the
five year average. Overall I would categorize the report as neutral to
slightly bearish.

At the moment the market is now back trading in
the $3.90 to $4.16/mmbtu trading range that was in play from the end of
April and through most of May. The market only spent 6 trading sessions
in the higher trading range. The market is looking for fundamental
support to move back to the higher trading range that it just declined
out of. The way the market is trading I would expect another week of the
speculative community reducing their net long positions as they have
done for the last three weeks in a row. If the market settles below the
$4.16/mmbtu level it would suggest that lower prices are likely on the
horizon from a technical viewpoint.

From a fundamental
perspective there is less nuclear outages compared to both last year and
the five year average at the moment. Currently there are 13,603 MW of
nuclear power sidelined versus 17,417 MW last year and 14,404 MW versus
the five year average. As such the call on Nat Gas to supplement nuclear
power generation is less than the historical data and suggestive that
the upcoming inventory injections are likely to over perform.

In
addition the latest NOAA temperature forecasts are less supportive than
those issued earlier in the week. The area of above normal temperatures
is now projected only over the east and west coasts with the rest of the
country expecting normal temperature with a few small pockets of below
normal temperatures in the mid-west through June 12th. Based on the
latest forecast it does not appear that there is going to be a surge in
Nat Gas cooling related demand anytime soon.

Thursday's EIA
report was neutral versus the market consensus, bearish versus last year
and slightly bullish compared to the five year average. The report
showed a net injection that at the market expectations, greater than
last year but slightly below the five year average net injection for the
same period. The 88 BCF injection (about normal for this time of the
year) was modestly equal to the Reuters market consensus calling for an
injection of around 88 BCF. The build of 88 BCF was slightly below my
model forecast (90 BCF injection) this week. The year over year
inventory situation remains in a strong deficit position versus last
year but has narrowed this week with the deficit versus the more normal
five year average holding steady. The current inventory deficit came in
at 88 BCF versus the normal five year average or about a negative 3.9
percent....MORE

If the Fed bought three quarters of the new issuance of Treasury
securities over an 8-month period, with a focus on longer maturities,
the 10-yr Treasury yield would almost certainly fall, right? And if the
Fed bought all the new issuance of MBS over an 8-month period,
increasing its share of home mortgages by over 40% in the process,
yields on MBS would almost certainly fall, right?

Wrong. The Fed has indeed been a huge buyer of Treasuries and MBS since
last September, but Treasury yields and MBS yields have moved
significantly higher, not lower.

What we've witnessed over the past 8 months—the duration so far of the
Fed's Quantitative Easing Part 3—is almost a laboratory experiment
designed to discover which is the more important determinant of
longer-term interest rates: the market's willingness to hold the
existing stock of bonds, or the actions of a very large purchaser of
bonds on the margin (i.e., the stock vs. flow argument).

It's my impression that most market participants have been persuaded by
the flow argument: namely, that the Fed's massive QE3 purchases have
artificially depressed market interest rates. After all, that's been the
Fed's stated intention: to buy lots of bonds in order to depress
interest rates and thereby stimulate borrowing and economic activity.
This line of reasoning says that the fact that 10-yr Treasury yields
averaged an exceptionally low 1.75% over the past year has nothing to do
with the market's view of inflation or economic growth; Treasury yields
have in fact become meaningless inputs to valuation models and offer no
insight into market and economic fundamentals, other than as a
distorting influence.

I've argued to the contrary on many occasions over the years. I believe
that interest rates are determined by the market's willingness to hold
the existing stock of bonds, especially since Fed purchases on the
margin represent only a small fraction of the existing stock. I think
the Fed can only influence yields to the extent that the market's view
of the economy is similar to the Fed's. If both expect the economy to be
very weak, yields will be low, and prices will behave as if Fed
purchases of bonds to stimulate the economy are in fact achieving their
stated objective. But if the market thinks the economy is improving
and/or inflation is rising, then no amount of Fed purchases will be able
to keep yields from rising. That's the situation today, and it's been
unfolding (in fits and starts) almost from the day QE3 began.

Since last September, when the Fed announced it would begin buying $40
billion per month of MBS, the Fed's holdings of MBS have increased by
about $330 billion, and that means the Fed has essentially purchased all
of the new MBS issuance since last September. As the chart above shows,
the Fed now owns over 12% of all home mortgages, up from less than 9%
at the end of last September. Yet despite these massive purchases, the
yields on MBS have increased by over 100 bps!...MORE

In 1994 there was great gaiety and celebration to mark the 500th anniversary of the publication of Luca Pacioli's treatise on, well, everything, hence the title: Summa. Accounting nerds around the world paid homage to the section on bookkeeping. You had to be there.

Unfortunately Benedikt Kotruljević had plowed the ground 36 years earlier with his Delia Mercatura et del Mercante Perfetto (Of Trading and the Perfect Trader) and the accounting profession had actually missed the quincentenary of the presentation of double entry bookkeeping to the world.

From Credit Writedowns:

How QE works and what this means for asset prices and credit

America is a land of contention, and one of the most contentious
topics here (I’m in Seattle as I write) is the impact of the Federal
Reserve’s policy of “Quantitative Easing”
– otherwise known as ‘QE’. The Federal Reserve has committed to
spending $85 billion every month buying a wide range of bonds from
banks, until such time as the US unemployment rate falls below 6.5 per
cent.

The Fed has implemented this policy because it believes it is the
best way to stimulate demand in a depressed economy. Its critics oppose
it because they believe this massive amount of ‘money printing’ must
inevitably lead to ruinous inflation.

I reckon they’re both wrong, and in a seriously wonky post I’ll try to explain why, using my modelling program Minsky.

Minsky develops a model of monetary flows
using double-entry bookkeeping – which is the same way that banks run
their businesses – so it’s a powerful way to cut through the confusion
over what actually happens in QE. But double-entry bookkeeping can make
your head spin because it involves lots of ALE – and unfortunately not
the fun intoxicating kind, but the boring accounting trio of Assets,
Liabilities and Equity.
The heart of accounting is the principle that the difference between
the debts other people owe to you (your Assets) and the debts you owe to
them (your Liabilities) is your net worth (your Equity). This is
drummed into accounting students as the “Fundamental Equation of Accounting”: “Assets equal Liabilities plus Equity”.Double-entry bookkeeping (DEB for short) enforces this equation in two ways. Firstly, it records any Asset as a positive amount, and Liabilities and Equity
as negative amounts. Secondly, it ensures that any transaction between
accounts sums to zero. So, for example, if a rich aunt died and left you
$1 million in her will, your accountant would show that as your Assets
changing by plus $1 million and your Equity changing by minus
$1 million. It sounds counter-intuitive when you first learn it, but it
works to make sure you don’t make mistakes when tracking financial
transactions.

Minsky uses a similar approach: Assets are
shown as positive sums, so assets are increased by adding to them – no
big deal there. But Liabilities (and Equity) are shown as negative sums,
so increasing a Liability involves subtracting from it (is your head
spinning yet?). So a loan of $1,000 from a bank is recorded as plus
$1,000 in its loan account – an increase in its Assets – and as minus
$1,000 in your deposit account – an increase in its Liabilities to you.
The sum across the row that records the transaction is zero.

Then Minsky assembles a model of financial
flows from the economy’s point of view, in which everything is shown as a
positive – just as the Federal Reserve does when it compiles its Flow
of Funds record of the entire economy.

Boy, I’ve probably lost half my normal audience already – and
probably to Ales of a different kind. But if the rest of you have
survived that intro, let’s plug on and build a model of QE....MUCH MORE

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased $43.8 billion in the first quarter, in contrast to an increase of $45.4 billion in the fourth.
Current-production cash flow (net cash flow with inventory valuation
adjustment) -- the internal funds available to corporations for
investment -- increased $110.9 billion in the first quarter, in contrast
to a decrease of $89.8 billion in the fourth.

That is not good. Domestic profits decreased materially and so did international profits by US business....MORE

Europe’s wood subsidies show the folly of focusing green policy on “renewables”

TO GO by the Domesday Book, the record of taxable lands produced for
William the Conqueror in 1086, the manor of Drax, in the West Riding of
Yorkshire, was not much of a place: six villagers, a priest and a value
to its lord of a single pound. But it did have five leagues of woodland.

Today Drax is home to one of the most impressive pieces of
engineering in Britain, a power station with a value to its owners of
£2.5 billion. But it does not have much woodland. And, given the way
Europe’s renewable-energy subsidies work, the appetites of that
facility, and others around Europe, may mean that wood is in short
supply in many places before long.

In 2009 the European Union set itself the target of getting 20% of its
energy from renewable sources. For all the fields and roofs covered with
solar panels and the once-empty uplands enlivened by wind turbines, by
far the biggest power source in the plans is biomass: wood, crop
residues and other burnable recently living stuff. The EU’s planners
want to get 1,210 terawatt hours of energy from biomass in 2020,
compared with 494TWh from wind. About 80% of that biomass energy would
be used to heat things—wood-burning stoves and boilers are widely used
in many European countries. But the 20% used to generate electricity
would still equal all the energy expected from solar panels and offshore
wind. With wind power not growing at the rate that planners want,
biomass may be called on to do even more....MORE

They want to return to the U.S. ca. 1800:

The story is also at the Wall Street Journal May 27:Europe's Green-Fuel Search Turns to America's Forests

The push isn't in North Carolina but
in Europe, where governments are trying to reduce fossil-fuel use and
carbon-dioxide emissions. Under pressure, some of the Continent's
coal-burning power plants are switching to wood.

But Europe doesn't have enough forests
to chop for fuel, and in those it does have, many restrictions apply.
So Europe's power plants are devouring wood from the U.S., where forests
are bigger and restrictions fewer.

This dynamic is bringing jobs to some
American communities hard hit by mill closures. It is also upsetting
conservationists, who say cutting forests for power is hardly an
environmental plus....

....Drax has long burned coal in a plant rising from pastoral Yorkshire
fields. This has become an increasingly unattractive practice, for a
variety of reasons that include a carbon tax floor the U.K. made
effective this year. Drax has set out to convert half its coal units to
wood.

The plant has converted one of its six
units so far, and last year it sold about $90 million of
renewable-energy credits to other companies, a spokeswoman said. After
it fully converts two more units, Drax expects to burn about seven
million tons of wood annually and collect about $600 million a year from
renewable-energy credits.....

Not everyone is turning to wood. Because of the decision to shut down their nukes Germany is burning braunkohle to keep the lights on
Reuters:Germany's clean energy drive fails to curb dirty brown coal

Germany's green energy drive is proving surprisingly good for dirty brown coal as utilities squeezed by rival renewables and low wholesale gas prices use more of it.

East Germany was a huge user of brown coal, or lignite, and Germany remains the world's biggest producer, but its use poses a problem for Berlin's environmental plans.

Limiting
brown coal use is politically difficult, however, with 20,000 mining
and utilities jobs involved and any move that could raise already high
energy bills for consumers a risky gambit ahead of federal elections in
September.

Coal also remains important to profits at utilities such as RWE and the German arm of Sweden's Vattenfall....MORE

European countries should pursue a balanced energy policy, otherwise
they will have to buy the firewood in Siberia, Russian Prime Minister
Vladimir Putin has joked.

Putin made it clear again that Europe and Russia are dependent on
each other. He was speaking with German businessmen in Berlin on Friday.
They gathered at a business conference organized by the German
newspaper Sueddeutsche Zeitung.

“The German public does not like the nuclear power industry for some reason,” Putin said, adding that he would not comment on it. “But I cannot understand what fuel you will take for heating,” he said anyway.

“You do not want gas, you do not develop the nuclear power industry, so you will heat with firewood?” Putin asked, as reported by Itar-Tass. “Then you will have to go to Siberia to buy the firewood there,” he said, adding that Europeans “do not even have firewood.”

The St. Louis Fed (8th) doesn't have as intensely agricultural an economy as the 9th, Minneapolis; the 7th, Chicago or the 10th, Kansas City but it does include a big chunk of the southern Illinois corn belt and the #1 rice producer, Arkansas and thus could be a harbinger for a leveling off of the land price increases and even some downticks.

From the Federal Reserve bank of St. Louis:

...Surprisingly, reported quality farmland, ranchland or pastureland prices are down slightly relative to the prices indicated in the fourth quarter of 2012...

The decreases were 2.3% for quality farmland and 5.1% for ranchland and pastureland.
More troubling, cash rents were down 8.6%.
Here's the Agricultural Finance Monitor (5 page PDF)

We've been following this trend for the last three years and have been asked when will it top?
One sign will be when Optima Fund Management brings their American Farmland Company public, still a few years away....

I think we're closer to the end of the boom than the beginning. The key now is farm income.
We'll be back with more tomorrow.

A thread about Raspberry Pi ended up on the front page of Reddit today,
and it’s a doozy. There are thousands of people taking part, and some
Pi projects mentioned that we’d never even imagined people taking on.
Some of them made our little hearts swell with pride. Teaching machines
for schools in Ecuador, prosthetic knees in the USA, musical instruments
controlled by eye movements for disabled people, solar flare detection,
wood engraving, pocket-money analyser – there’s something here for
everyone.
You guys are brilliant. With your ideas and our tiny computer, we
could get together to rule the universe. Bags I get to wear the hat with
the diamonds.(Update to add: Incidentally, the guy who says his friend
disassembled a Pi and built a better one, so we gave him a job? Big fat
liar.)

And here's a guy who uses it to circumvent the Great Firewall of China, from the Reddit thread above:

I study in China, so I
have to fight against censorship everyday. I set my Raspberry to
automatically connect to my VPN server through OpenVPN, and then share
the connexion with a wifi dongle, using hostapd software. I use it on
daily basis with my iPhone and Android tablet (way better than the
included VPN client) but the good thing is that, wherever I go, i just
bring my Raspberry, plug it to ethernet and to any usb plug, and after a
few minutes, I have my censor-free wifi hotspot :)

Update below.Original post:
If you are new to this stuff, listen up. What's going on with Rasberry Pi is a throwback to Packard and Hewlett, Jobs and Wozniak or any other garage band you can think of.
Folks are taking these tiny computers and using them to do everything from controlling LEGO robots to this impressive bit of tinkering.
From ZD Net:

Who says you need a few million bucks to build a supercomputer? Joshua
Kiepert put together a Linux-powered Beowulf cluster with Raspberry Pi
computers for less than $2,000.

When you think do-it-yourself (DIY) computing,
you probably think of setting up a screaming gaming computer or putting
together the best possible components for the least amount of money.
You're almost certainly not considering putting together a
supercomputer. Maybe you should. Joshua Kiepert, a doctoral student at
Boise State's Electrical and Computer Engineering department, has
managed to create a mini-supercomputer using Raspberry Pi (RPi) computers for less than $2,000.

Say hello to a homebrew Raspberry Pi-based supercomputer.

Raspberry Pi is a single-board Linux-powered computer.
They're powered by 700MHz ARM11-processors and include a Videocore IV
GPU. The Model B, which is what Kiepert is using, comes with 512MBs of
RAM, two USB ports and a 10/100 BaseT Ethernet port. For his project
Kiepert overclocked the processors to 1GHz.

By itself the Raspberry Pi is interesting, but it seems an unlikely
supercomputer component. But, Kiepert had a problem. He was doing his
doctoral research on data sharing for wireless sensor networks by
simulating these networks on Boise State's Linux-powered Onyx
Beowulf-cluster supercomputer. This modest, by supercomputer standards,
currently has 32 nodes, each of which has a 3.1GHz Intel Xeon E3-1225
quad-core processor and 8GBs of RAM.

A Beowulf cluster
is simply a collection of inexpensive commercial off the shelf (COTS)
computers networked together running Linux and parallel processing
software. First designed by Don Becker and Thomas Sterling at Goddard
Space Flight Center in 1994, this design has since become one of the core supercomputer architectures.

"First, while the Onyx cluster has an excellent uptime rating, it
could be taken down for any number of reasons. When you have a project
that requires the use of such a cluster and Onyx is unavailable, there
are not really any other options on campus available to students aside
from waiting for it to become available again. The RPiCluster provides
another option for continuing development of projects that require MPI
[Message Passing Interface] or Java in a cluster environment....MUCH MORE